Unraveling Why A Fed President Just Suggested Doubling QE3

Chicago Federal Reserve Bank President Charles Evans was
interviewed on CNBC on
Monday, and he indicated that he was in favor of continuing asset
purchases at a rate of $85 billion per month all the way through
2013. If approved by the rest of the Fed, this would have
the effect of about doubling the size of "QE3", or Quantitative
Easing Three, the massive Federal Reserve monetary creation
and market intervention program announced only three weeks ago.

QE3 combines mortgage security purchases of $40 billion per month
until the labor market substantially improves, while continuing
"Operation Twist", with the Federal Reserve switching another $45
billion a month out of short term Treasuries and into long term
Treasury bonds through December. There is a total of $85
billion per month in asset purchases, of which $40 billion a
month is to be financed by creating new money out of thin
air. Importantly, the amount of market interventions is
scheduled to drop in half at the end of 2012.

If the Federal Reserve follows through with what Evans proposes,
it will mean that the pace of $85 billion a month won't slow, and
that an additional $540 billion will be created out of thin air
over the course of 2013, which will likely be directly injected
into the economy without "sterilization". In other words,
what Evans is proposing is that the government create and spend a
little more than $5,500 per above-poverty-line household to
manipulate the markets and to hold down pension and retirement
investment returns.

Not too long ago, this would have been the most aggressive and
irresponsible action in the history of the Federal Reserve.
But at this stage with QE1, QE2, QE3, Twist 1, Twist 2, along
with assorted trillions of dollars in loans and purchases with
unnamed parties under secret terms, a mere proposal by a
(currently) non-voting member of the Fed's policy-making Open
Market Committee (FOMC) to increase the size of an already
staggering program to an even more staggering amount might not
seem like that big of deal to the small slice of the public that
pays attention to this sort of thing.

So why did Charlie Evans do it? And why did Ben
Bernanke likely authorize the nationally televised interview?

Let me suggest that it is only when we answer those questions
that we can find out what the Fed is really up to - which is
playing a quite different game than what is being put out in the
press releases.

Implausible Explanations - Conventional

We'll start with the conventional perspective. The Federal
Reserve and Ben Bernanke are already taking a great deal of heat
over the recently announced massive and open-ended QE3
program. There is loud and public skepticism about whether
QE3 will actually make any difference to the economy, given that
both QE1 & QE2 failed in their stated goals of restarting the
economy and housing market.

Given the size of QE3, even members of the Federal Reserve are
starting to publicly express concern over the danger of causing
increased rates of inflation, as shown by the recent comments
from Richmond Federal Reserve Bank President Jeffrey Lacker in
explaining his dissenting vote on QE3.

There is a presidential election next month, and Bernanke is
already taking a great deal of heat for QE3. Why toss
gasoline on the fire and have a non-voting board member talk
about doubling down on the size of QE3? After all, there is
no money being created and no solutions are actually implemented
- there is just the risk of political damage for seemingly no
benefit at all.

Why did a non-voting Fed member go on national TV to talk
about his desire to increase the size of QE3 months down the
road? Why risk the pain for no gain?

Implausible Explanations - Contrarian

If the conventional doesn't make sense, then maybe it is the
usual contrarian perspective that will hold the answers. OK
then, let's assume that what many are writing about is true,
which is that the United States dollar is right on the brink of
collapse, with destruction likely to occur in the fall of 2012,
even as the Federal Reserve desperately tries to hold on.

Now, from that viewpoint, the Federal Reserve and the US dollar
are on the verge of imminent annihilation because of the massive
creation of fiat currency that is about to lead to a complete
collapse in confidence. Viewed from that perspective, what
Charles Evens just proposed was insanely stupid - as he just
accelerated the loss of confidence and resulting destruction of
the dollar for no gain whatsoever. There is no money being
created and spent - he's merely talking about why he wants to do
so.

Why would he do that? Why did Ben let him?

Again: why would a non-voting Fed member go on national
TV to talk about his desire to increase the size of QE3 months
down the road?

An Explanation That Is A Perfect Fit

The problem with both the conventional and contrarian
perspectives is that Evans went on TV to talk some radical talk
that risked bringing down the value of the dollar, but without
being in any position to actually do anything about it for some
time to come.

If there is a logical explanation to be found then, we should
seek outcomes in which it is desirable for Bernanke to use a
credible and substantive proxy to talk trash about the dollar and
bring it down in value, without actually taking the accompanying
concrete actions to go along with it. If he had such an
objective, Bernanke would want to deploy someone important enough
to command the full attention of the global professionals who
watch the Federal Reserve - but at the same time be sufficiently
obscure that the average US citizen or reporter would have never
heard of him or her, making the proxy far less risky than
Bernanke himself making the comments.

The Federal Reserve is indeed using QE3 to attack the problem
of unemployment - but not through the method stated.

The cover story is that QE3 will be used to increase the
money available for lending and to lower interest rates. It
is a credit to Mr. Bernanke that he was able to read this
statement with a straight face, for the assertion that the
economy is being held down by too high of interest rates and
tight money is ludicrous. Interest rates are already at
historic lows, and banks are awash in available cash.
Moreover, QE3 is likely to have very little effect when it comes
to expanding corporate lending, just as QE2 had very little
effect - because that was never the intended route to rebooting
employment in the United States.

As described in detail in my article "Bullets In The Back:
How Boomers & Retirees Will Become Bailout, Stimulus &
Currency War Casualties" (linked below) the United States has a
structural problem with unemployment that is essentially
unsolvable so long as the dollar remains high in value relative
to other global currencies.

This problem was exacerbated by the rise in the US dollar
caused by the Euro crisis - and it is no coincidence that the
unemployment crisis in the United States is now getting rapidly
worse even as the dollar soared this past spring and summer.

The Federal Reserve is, of course, well aware that the
unemployment situation is far, far worse than what is being
captured in the official headline unemployment rate of
8.1%. The government knows full well that the true
unemployment rate, once workforce participation rate
manipulations are netted out, is closer to 19% - and getting
worse, as explored in detail in my article linked below, "Making
9 Million Jobless "Vanish": How The Government Manipulates
Unemployment Statistics".

This building crisis of a strengthening dollar and rising
unemployment called for emergency action, and that is exactly
what Bernanke is doing. He is effectively calling in a B-52
strike on the US dollar, monetizing for the world to see, and
pledging to monetize for as long as it takes - until the US
dollar is driven down to a level where American workers can once
again be globally competitive.

If the rest of the world sits back and lets the United States
drive down the value of the dollar, then US employment is indeed
likely to rise - at the cost of falling employment
elsewhere. But if the rest of the world is not willing to
sit back and watch jobs flow to the US, then there is likelihood
of counterstrikes, and even the danger of all-out currency
warfare.

Now, let's look at the situation at the start of this week.
The building anticipation and then finally the announcement of
QE3 had been successful, having driven the dollar from a summer
high of 1.206 dollars per Euro down to 1.31 dollars per Euro by
mid-September. Then Spain starts to go south, the Euro
looks like it is in trouble again, and the dollar starts rising
again. The situation gets markedly worse in Spain over the
weekend, and the dollar looks poised to rise again. Which,
if allowed to happen, would make US workers that much less
competitive around the world, and lead to job losses instead of
job gains.

Until, that is, a non-voting member of the Federal Reserve Open
Market Committee goes on national TV to talk about his desire to
see the size of QE3 more than doubled in another few months.

And it looks like it has worked, as the dollar moved from a high
of 1.280 dollars per euro on Monday, down to a price of 1.292
dollars per euro on Tuesday afternoon. Now, this may be
fleeting if the Spanish situation continues to deteriorate.
But nonetheless, the only price for the dollar moving the
opposite way that a reserve currency should move during crisis,
was a senior Fed official doing a little trash talk about the
dollar on TV in a way that his own nation barely noticed - but
the rest of the world did.

Suddenly, everything adds up perfectly. The "pain" is the
gain, it is the objective and not the undesirable
by-product. Whether what Evans proposes ever happens or not
in 2013 is almost incidental during the first week of October
2012. What matters is that there is bad news out of Spain and a
pre-emptive attempt at changing the psychology of the market must
be made, before there is a repeat of the damage that occurred in
the spring and summer as a result of the US dollar being the
globe's reserve currency.

The point at which things go from not adding up at all to adding
up perfectly is a good place for considering a paradigm shift,
and then evaluating whether the Fed's real strategy is one of
attempting to increase employment by waging undeclared currency
warfare - with the myriad financial implications that follow.